If you want to learn how to invest in the stock market, you have come to the right place. While investing is more accessible than ever, you can save a lot of money learning how to invest in the stock market the right way rather than just running out and buying stock on a whim.
In this article, you will not only find out the different methods for investing in stock, but also how to save money on taxes and diversify your risks.
First, we will start with the different ways you can purchase stock and then talk about how you can use the stock-buying method of the rich to potentially save money and prevent losing out on your investment! Get ready to learn how to invest!
How to Invest in the Stock Market – Different Methods
While it can be tempting to open up an online trading account, transfer some money from your bank account, and then buy a stock you have had your eye on, you should know that this is actually the least profitable way to invest in stock. Instead, you can invest through your retirement accounts to reduce the amount of taxes you will pay on your investment earnings.
Investing in Stock: 401ks and Roth IRAs
For the average person, you will be able to invest in stocks through your your 401k (if you work for a company) or your 403b (if you work for a non-profit) which is set up through your employer. If you contribute to this fund, most employers will match a portion of what you contribute to this fund.
Contributions to your 401k are usually tax deductible, meaning that if your salary is $50,000 and you contribute 5k to your 401k, you will only pay tax on $45,000 of income. The downside to the 401k though is that you pay tax on the money once you withdrawal it, including its earnings.
On the other hand, you can set up a Roth IRA, which you can contribute out of your own pocket (not tax-deductible). However, earnings on these funds are actually tax-free if you wait for 5 years and until you are 59 and a half years old to withdrawal the money. These are typically preferred for investors saving for retirement that are looking to contribute money to their retirement beyond what their company matches.
Once you have either one of these accounts set up, you can actually control the money and use these funds to invest in stock. You can learn more about investing through your 401k or a Roth IRA on this site soon when we add more content regarding this topic.
Of course, you want to diversify your investment; it is not wise to invest the entirety of your 401k and Roth IRA into stock, as if the stock market crashes, you lose your safety net!
Most banks managing your retirement account will try to direct you into depositing your funds into one of there mutual funds. Learn more about mutual funds in our article, What Are Mutual Funds? You may decide this default option is not right for you, especially if you want to manage your own investments.
Learn How to Invest In The Stock Market – Using a Brokerage
There may come a time when you want to know how to invest in the stock market directly – skipping over the retirement accounts and acquiring stock directly. There are a few reasons for this:
- You have already maxed out 401k/403b and IRA contributions;
- You want to invest in the short term (less than 5 years);
- You want to access the money before retirement age and avoid penalty for withdrawal;
- Your annual net income is too high to qualify for tax deductions.
In this case, the easiest route for investing in the stock market depends on exactly how much money you have to invest. If you are investing $50,000, you will generally find the cheapest rates for investing are through online brokerages. These typically charge 7-15$ per transaction (i.e. buying or selling a stock), which is a good price.
On the other hand, if you are moving around large sums of money, banks and other larger brokerages will often cut you a cheaper rate or may provide a financial advisor for you to manage your portfolio for a fee. Whether or not you decide to invest on your own or with an advisor is up to you.
Once you set up an account at a brokerage (usually this is free), you can generally transfer money directly from your bank account for a very low fee or even free of charge. Then, through a stock brokerage’s online portal you can usually buy a stock.
How to Invest in the Stock Market – Buying Stock
Once you do actually decide to invest in the stock market, investors nearly unanimously agree to invest into multiple companies. It is an extreme risk to invest into only one or a few companies, because if any one of those companies has a bad year (or worse, goes out of business), you will lose a lot of money.
You can help spread this risk around by investing in different sectors. For example, rather than buying only tech stocks, you would want some stocks in the food industry, some in the tech industry, some in the health care industry, and so on. As you get more into the market, you can put more money into fields you think will have a good year, and move money out of markets you suspect will falter.
Another good investing tip is to spread out your purchasing over 3 months. So, if you planned to invest $3,000 into a particular company, you would spend $1,000 on the stock on day 1, $1,000 on the stock 30 days later, and $1,000 of the stock 30 days after that. This way, you do not accidentally buy the stock on a particularly high day. This spreads the risk around in case the stock tanks right after you buy it.
Learn more about the stock market through some of our popular stock market articles:
- Stock Market Basics
- How the Stock Market Works
- Stock Market Investing for Beginners
- Getting Started in the Stock Market
- Different Types of Stocks to Invest In
Investing in the Stock Market – Types of Stock
If you do decide to invest in the stock market, you should know that there are two types of stock. If you are a beginning investor, most people would suggest investing smaller amounts into a lot of different stocks.
Most investors will want to start with common stocks or mutual funds. Common stocks are general shares of stock in a company that you would typically buy on the New York Stock Exchange. You might also invest in a mutual fund, which is typically a fund which owns various different stocks, commodities, and the like.
Out of your typical common stocks, you should know that there are both normal and dividend stocks. If you own a dividend stock, you will get a small payout quarterly or annually. Read about some of the top dividend stocks in our article on the best dividend paying stocks.
Also, there are 9 different major sectors you can invest in. Learn what these are so you can better diversify your holdings in our Stock Market Sectors List.
How to Invest in the Stock Market – Wrap-Up
There are a lot of different ways to invest in the stock market, but most of us will want to do it via our 401k, 403b, and IRA accounts. Once you have some extra money to invest, you can consider going through a brokerage or buying into a mutual fund to own stock directly.
Be sure to research your potential buys thoroughly, buy stock over time rather than all at once, and buy into multiple companies to help reduce risk.
However, know that stocks are never truly without risk, which is why most investors recommend keeping some money in things like bonds, liquid, real estate, and precious metals.
For advice on buying the right stocks, check out our stock market investing advice. You should also read our Free Stock Market Trading Tips for Beginners. You can use these strategies to pick out which stocks are right for your portfolio. You can also use these tips to make sure you are not overpaying for your stocks.